Edgar Filing: CONOCOPHILLIPS

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10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2018

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 001-32395

ConocoPhillips

(Exact name of registrant as specified in its charter)

Delaware

01-0562944

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

600 North Dairy Ashford, Houston, TX 77079

(Address of principal executive offices) (Zip Code)

281-293-1000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The registrant had 1,162,095,308 shares of common stock, $.01 par value, outstanding at June 30, 2018.

CONOCOPHILLIPS

TABLE OF CONTENTS


	Page

Part I—Financial Information

Item 1. Financial Statements
Consolidated Income Statement		1
Consolidated Statement of Comprehensive Income		2
Consolidated Balance Sheet		3
Consolidated Statement of Cash Flows		4
Notes to Consolidated Financial Statements		5
Supplementary Information—Condensed Consolidating Financial Information		33

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		38

Item 3. Quantitative and Qualitative Disclosures About Market Risk		61

Item 4. Controls and Procedures		61

Part II—Other Information

Item 1. Legal Proceedings		62

Item 1A. Risk Factors		63

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		64

Item 6. Exhibits		65

Signature		66

PART I. FINANCIAL INFORMATION

Item 1.

FINANCIAL STATEMENTS


Consolidated Income Statement			ConocoPhillips


	Millions of Dollars
	Three Months Ended June 30						Six Months Ended June 30
	2018			2017*			2018			2017*

Revenues and Other Income
Sales and other operating revenues	$	8,504			6,781			17,302			14,299
Equity in earnings of affiliates		265			178			473			378
Gain on dispositions		55			1,876			62			1,898
Other income		416			47			364			78

Total Revenues and Other Income		9,240			8,882			18,201			16,653


Costs and Expenses
Purchased commodities		3,064			2,922			6,778			6,114
Production and operating expenses		1,313			1,325			2,484			2,616
Selling, general and administrative expenses		118			95			217			192
Exploration expenses		69			97			164			647
Depreciation, depletion and amortization		1,438			1,625			2,850			3,604
Impairments		(35	)		6,294			(23	)		6,469
Taxes other than income taxes		273			198			456			429
Accretion on discounted liabilities		89			92			177			187
Interest and debt expense		177			306			361			621
Foreign currency transaction (gains) losses		(28	)		13			2			23
Other expenses		143			276			340			344

Total Costs and Expenses		6,621			13,243			13,806			21,246

Income (loss) before income taxes		2,619			(4,361	)		4,395			(4,593	)
Income tax provision (benefit)		965			(935	)		1,841			(1,766	)

Net income (loss)		1,654			(3,426	)		2,554			(2,827	)
Less: net income attributable to noncontrolling interests		(14	)		(14	)		(26	)		(27	)

Net Income (Loss) Attributable to ConocoPhillips	$	1,640			(3,440	)		2,528			(2,854	)


Net Income (Loss) Attributable to ConocoPhillips Per Share of Common Stock (dollars)
Basic	$	1.40			(2.78	)		2.15			(2.30	)
Diluted		1.39			(2.78	)		2.13			(2.30	)

Dividends Paid Per Share of Common Stock (dollars)	$	0.29			0.27			0.57			0.53

Average Common Shares Outstanding (in thousands)
Basic		1,172,378			1,236,831			1,176,064			1,240,037
Diluted		1,181,167			1,236,831			1,184,499			1,240,037

*	Certain amounts have been reclassified to conform to the current-period presentation resulting from the adoption of ASU No. 2017-07. See Note 2—Changes in Accounting Principles, for additional information.

See Notes to Consolidated Financial Statements.


Consolidated Statement of Comprehensive Income			ConocoPhillips


	Millions of Dollars
	Three Months Ended June 30						Six Months Ended June 30
	2018			2017			2018			2017


Net Income (Loss)	$	1,654			(3,426	)		2,554			(2,827	)
Other comprehensive loss
Defined benefit plans
Reclassification adjustment for amortization of prior service credit included in net income (loss)		(10	)		(10	)		(20	)		(19	)
Net actuarial loss arising during the period		(42	)		(32	)		(42	)		(39	)
Reclassification adjustment for amortization of net actuarial losses included in net income (loss)		171			66			195			156
Nonsponsored plans*		(1	)		—			(1	)		—
Income taxes on defined benefit plans		(25	)		(8	)		(28	)		(34	)

Defined benefit plans, net of tax		93			16			104			64

Unrealized holding loss on securities**		—			(424	)		—			(424	)

Unrealized loss on securities, net of tax**		—			(424	)		—			(424	)

Foreign currency translation adjustments		(359	)		27			(281	)		211

Foreign currency translation adjustments, net of tax		(359	)		27			(281	)		211

Other Comprehensive Loss, Net of Tax		(266	)		(381	)		(177	)		(149	)

Comprehensive Income (Loss)		1,388			(3,807	)		2,377			(2,976	)
Less: comprehensive income attributable to noncontrolling interests		(14	)		(14	)		(26	)		(27	)

Comprehensive Income (Loss) Attributable to ConocoPhillips	$	1,374			(3,821	)		2,351			(3,003	)

*Plans for which ConocoPhillips is not the primary obligor, primarily those administered by equity affiliates.

**See Note 2—Changes in Accounting Principles and Note 16—Accumulated Other Comprehensive Loss for additional information relating to the adoption of ASU No. 2016-01.

See Notes to Consolidated Financial Statements.


Consolidated Balance Sheet			ConocoPhillips


	Millions of Dollars
	June 30			December 31
	2018			2017

Assets
Cash and cash equivalents	$	3,234			6,325
Short-term investments		612			1,873
Accounts and notes receivable (net of allowance of $2 million in 2018 and $4 million in 2017)		3,750			4,179
Accounts and notes receivable—related parties		180			141
Investment in Cenovus Energy		2,159			1,899
Inventories		1,093			1,060
Prepaid expenses and other current assets		580			1,035

Total Current Assets		11,608			16,512
Investments and long-term receivables		9,435			9,599
Loans and advances—related parties		399			461
Net properties, plants and equipment (net of accumulated depreciation, depletion and amortization of $68,169 million in 2018 and $64,748 million in 2017)		46,306			45,683
Other assets		1,188			1,107

Total Assets	$	68,936			73,362


Liabilities
Accounts payable	$	3,642			4,009
Accounts payable—related parties		24			21
Short-term debt		89			2,575
Accrued income and other taxes		1,301			1,038
Employee benefit obligations		511			725
Other accruals		1,071			1,029

Total Current Liabilities		6,638			9,397
Long-term debt		14,885			17,128
Asset retirement obligations and accrued environmental costs		7,665			7,631
Deferred income taxes		5,534			5,282
Employee benefit obligations		1,774			1,854
Other liabilities and deferred credits		1,218			1,269

Total Liabilities		37,714			42,561


Equity
Common stock (2,500,000,000 shares authorized at $.01 par value)
Issued (2018—1,788,950,536 shares; 2017—1,785,419,175 shares)
Par value		18			18
Capital in excess of par		46,746			46,622
Treasury stock (at cost: 2018—626,855,228 shares; 2017—608,312,034 shares)		(41,052	)		(39,906	)
Accumulated other comprehensive loss		(5,637	)		(5,518	)
Retained earnings		30,967			29,391

Total Common Stockholders’ Equity		31,042			30,607
Noncontrolling interests		180			194

Total Equity		31,222			30,801

Total Liabilities and Equity	$	68,936			73,362

See Notes to Consolidated Financial Statements.


Consolidated Statement of Cash Flows			ConocoPhillips


	Millions of Dollars
	Six Months Ended June 30
		2018		2017

Cash Flows From Operating Activities
Net income (loss)	$	2,554		(2,827	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Depreciation, depletion and amortization		2,850		3,604
Impairments		(23	)	6,469
Dry hole costs and leasehold impairments		36		428
Accretion on discounted liabilities		177		187
Deferred taxes		262		(2,548	)
Undistributed equity earnings		94		(121	)
Gain on dispositions		(62	)	(1,898	)
Other		(238	)	175
Working capital adjustments
Decrease in accounts and notes receivable		455		313
Increase in inventories		(21	)	(3	)
Increase in prepaid expenses and other current assets		(148	)	(135	)
Decrease in accounts payable		(282	)	(178	)
Increase in taxes and other accruals		87		75

Net Cash Provided by Operating Activities		5,741		3,541


Cash Flows From Investing Activities
Capital expenditures and investments		(3,534	)	(1,986	)
Working capital changes associated with investing activities		(92	)	(113	)
Proceeds from asset dispositions		308		10,742
Net sales (purchases) of short-term investments		1,257		(2,653	)
Collection of advances/loans—related parties		59		57
Other		(25	)	176

Net Cash Provided by (Used in) Investing Activities		(2,027	)	6,223


Cash Flows From Financing Activities
Repayment of debt		(4,952	)	(4,079	)
Issuance of company common stock		42		(63	)
Repurchase of company common stock		(1,146	)	(1,075	)
Dividends paid		(675	)	(662	)
Other		(48	)	(64	)

Net Cash Used in Financing Activities		(6,779	)	(5,943	)


Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Cash		(14	)	103


Net Change in Cash, Cash Equivalents and Restricted Cash		(3,079	)	3,924
Cash, cash equivalents and restricted cash at beginning of period		6,536	*	3,610

Cash, Cash Equivalents and Restricted Cash at End of Period	$	3,457		7,534

* Restated to include $211 million of restricted cash at January 1, 2018. See Note 2—Changes in Accounting Principles for additional information relating to the adoption of ASU No. 2016-18.

Restricted cash totaling $223 million is included in the “Other assets” line of our Consolidated Balance Sheet as of June 30, 2018.

See Notes to Consolidated Financial Statements.


Notes to Consolidated Financial Statements			ConocoPhillips

Note 1—Basis of Presentation

The interim-period financial information presented in the financial statements included in this report is unaudited and, in the opinion of management, includes all known accruals and adjustments necessary for a fair presentation of the consolidated financial position of ConocoPhillips and its results of operations and cash flows for such periods. All such adjustments are of a normal and recurring nature unless otherwise disclosed. Certain notes and other information have been condensed or omitted from the interim financial statements included in this report. Therefore, these financial statements should be read in conjunction with the consolidated financial statements and notes included in our 2017 Annual Report on Form 10-K.

Note 2—Changes in Accounting Principles

We adopted the provisions of Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2014-09, “Revenue from Contracts with Customers,” and its amendments issued by the provisions of ASU No. 2016-08, “Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” ASU No. 2016-10, “Identifying Performance Obligations and Licensing,” ASU No. 2016-12, “Narrow-Scope Improvements and Practical Expedients,” and ASU No. 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue From Contracts with Customers,” collectively Accounting Standards Codification (ASC) Topic 606, “Revenue from Contracts with Customers,” (ASC Topic 606) beginning January 1, 2018. ASC Topic 606 outlines a single comprehensive model for an entity to use in accounting for revenue arising from all contracts with customers except where revenues are in scope of another accounting standard. The ASU superseded the revenue recognition requirements in ASC Topic 605, “Revenue Recognition,” and most industry-specific guidance. ASC Topic 606 sets forth a five-step model for determining when and how revenue is recognized. Under the model, an entity is required to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods and services. ASC Topic 606 also requires certain additional revenue-related disclosures. The adoption of ASC Topic 606 did not have a material impact on our consolidated financial statements. See Note 20—Sales and Other Operating Revenues for additional information related to this ASC.

We adopted the provisions of FASB ASU No. 2016-01, “Recognition and Measurement of Financial Assets and Liabilities,” (ASU No. 2016-01) beginning January 1, 2018. The ASU, among other things, requires an entity to record the changes in fair value of equity investments, other than investments accounted for using the equity method, within net income. Under this ASU, an entity is no longer able to recognize unrealized holding gains and losses on available-for-sale securities in other comprehensive income and instead must recognize them in the income statement. See Note 7—Investment in Cenovus Energy and Note 16—Accumulated Other Comprehensive Loss for additional information relating to this ASU.

The cumulative effect of the changes made to our consolidated balance sheet at January 1, 2018, for the adoption of ASC Topic 606 and ASU No. 2016-01 were as follows:


	Millions of Dollars
	December 31 2017			ASC Topic 606 Adjustments			ASU No. 2016-01 Adjustments			January 1 2018

Liabilities
Other accruals	$	1,029			104			—			1,133
Total current liabilities		9,397			104			—			9,501
Deferred income taxes		5,282			(31	)		—			5,251
Other liabilities and deferred credits		1,269			147			—			1,416
Total liabilities		42,561			220			—			42,781


Equity
Accumulated other comprehensive loss	$	(5,518	)		—			58			(5,460	)
Retained earnings		29,391			(220	)		(58	)		29,113
Total common stockholders’ equity		30,607			(220	)		—			30,387
Total equity		30,801			(220	)		—			30,581

For discussion of adjustments for ASU No. 2016-01 and ASC Topic 606, see Note 7—Investment in Cenovus Energy and Note 20—Sales and Other Operating Revenues, respectively.

We adopted the provisions of FASB ASU No. 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,” beginning January 1, 2018. We retrospectively applied the presentation of service cost separate from the other components of net periodic costs. The interest cost, expected return on plan assets, amortization of prior service cost/credit, recognized net actuarial loss/gain, settlement expense, curtailment loss/gain, and special termination benefits have been reclassified from the “Production and operating expenses,” “Selling, general and administrative expenses,” and “Exploration expenses” lines to the “Other expenses” line on our consolidated income statement. We elected to apply the practical expedient which allows us to reclassify amounts disclosed previously in the employee benefit plans footnote as the basis for applying retrospective presentation for prior comparative periods as it is impracticable to determine the disaggregation of the cost components for amounts capitalized and amortized in those periods. On a prospective basis, the other components of net periodic benefit costs will not be included in amounts capitalized in inventory or properties, plants, and equipment (PP&E).

The effect of the retrospective presentation change related to the net periodic benefit cost of our defined benefit pension and other postretirement employee benefits plans on our consolidated income statement was as follows:


	Millions of Dollars
	Previously Reported		Effect of Change Higher/(Lower)			As Revised

Three Months Ended June 30, 2017
Production and operating expenses	$	1,327		(2	)		1,325
Selling, general and administrative expenses		134		(39	)		95
Exploration expenses		98		(1	)		97
Other expenses		234		42			276


Six Months Ended June 30, 2017
Production and operating expenses	$	2,625		(9	)		2,616
Selling, general and administrative expenses		291		(99	)		192
Exploration expenses		649		(2	)		647
Other expenses		234		110			344

We adopted the provisions of FASB ASU No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments,” beginning January 1, 2018. This ASU clarifies how certain cash receipts and cash payments should be classified and presented in the statement of cash flows. We have made an accounting policy election to classify distributions received from equity method investees using the nature of the distribution approach which classifies distributions received from investees as either cash inflows from operating activities or cash inflows from investing activities in the statement of cash flows based on the nature of the activities of the investee that generated the distribution. The impact of adopting this ASU was not material to prior presented periods.

We adopted the provisions of FASB ASU No. 2016-18, “Restricted Cash,” beginning January 1, 2018. This ASU requires amounts deemed restricted cash to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows, and presentation should permit a reconciliation when cash, cash equivalents and restricted cash are presented in more than one line item on the balance sheet. We have amounts deposited in statutory bank accounts in certain countries to satisfy asset retirement obligations (ARO). These amounts are deemed restricted cash and are included in the “Other assets” line of our consolidated balance sheet. This standard is required to be applied retrospectively to all periods presented, but the impact in those periods was not material.

Note 3—Variable Interest Entities (VIEs)

We hold variable interests in VIEs that have not been consolidated because we are not considered the primary beneficiary. Information on our significant VIEs follows:

Australia Pacific LNG Pty Ltd (APLNG)

APLNG is considered a VIE, as it has entered into certain contractual arrangements that provide it with additional forms of subordinated financial support. We are not the primary beneficiary of APLNG because we share with Origin Energy and China Petrochemical Corporation (Sinopec) the power to direct the key activities of APLNG that most significantly impact its economic performance, which involve activities related to the production and commercialization of coalbed methane, as well as liquefied natural gas (LNG) processing and export marketing. As a result, we do not consolidate APLNG, and it is accounted for as an equity method investment.

As of June 30, 2018, we have not provided any financial support to APLNG other than amounts previously contractually required. Unless we elect otherwise, we have no requirement to provide liquidity or purchase the assets of APLNG. See Note 6—Investments, Loans and Long-Term Receivables, and Note 12—Guarantees, for additional information.

Marine Well Containment Company, LLC (MWCC)

MWCC provides well containment equipment and technology and related services in the deepwater U.S. Gulf of Mexico. Its principal activities involve the development and maintenance of rapid-response hydrocarbon well containment systems that are deployable in the Gulf of Mexico on a call-out basis. We have a 10 percent ownership interest in MWCC, and it is accounted for as an equity method investment because MWCC is a limited liability company in which we are a Founding Member and exercise significant influence through our permanent seat on the ten-member Executive Committee responsible for overseeing the affairs of MWCC. In 2016, MWCC executed a $154 million term loan financing arrangement with an external financial institution whose terms required the financing be secured by letters of credit provided by certain owners of MWCC, including ConocoPhillips. In connection with the financing transaction, we issued a letter of credit of $22 million which can be drawn upon in the event of a default by MWCC on its obligation to repay the proceeds of the term loan. The fair value of this letter of credit is immaterial and not recognized on our consolidated balance sheet. MWCC is considered a VIE, as it has entered into arrangements that provide it with additional forms of subordinated financial support. We are not the primary beneficiary and do not consolidate MWCC because we share the power to govern the business and operation of the company and to undertake certain obligations that most significantly impact its economic performance with nine other unaffiliated owners of MWCC.

At June 30, 2018, the carrying value of our equity method investment in MWCC was $133 million. We have not provided any financial support to MWCC other than amounts previously contractually required. Unless we elect otherwise, we have no requirement to provide liquidity or purchase the assets of MWCC.

Note 4—Inventories

Inventories consisted of the following:


	Millions of Dollars
	June 30 2018		December 31 2017


Crude oil and natural gas	$	530		512
Materials and supplies		563		548

	$	1,093		1,060

Inventories valued on the last-in, first-out (LIFO) basis totaled $316 million and $341 million at June 30, 2018 and December 31, 2017, respectively. The estimated excess of current replacement cost over LIFO cost of inventories was $103 million and $124 million at June 30, 2018 and December 31, 2017, respectively.

Note 5—Assets Held for Sale, Sold or Acquired and Other Planned Transactions

Assets Held for Sale

As of December 31, 2017, our interest in the Barnett asset met the criteria for assets held for sale. In the first quarter of 2018, we recorded an impairment of $44 million to reduce the net carrying value to fair value of $250 million. Marketing efforts ceased in April 2018, and the assets were reclassified as held for use in the second quarter of 2018. The Barnett results of operations are reported in our Lower 48 segment.

Assets Sold

In the first quarter of 2018, we completed the sale of certain properties in the Lower 48 segment for net proceeds of $112 million. No gain or loss was recognized on the sale. In the second quarter of 2018, we completed the sale of a package of largely undeveloped acreage in the Lower 48 segment for $105 million. No gain or loss was recognized on the sale.

On May 17, 2017, we completed the sale of our 50 percent nonoperated interest in the Foster Creek Christina Lake (FCCL) Partnership, as well as the majority of our western Canada gas assets to Cenovus Energy. Consideration for the transaction included a five-year uncapped contingent payment. The contingent payment, calculated on a quarterly basis, is $6 million Canadian dollars (CAD) for every $1 CAD by which the Western Canada Select (WCS) quarterly average crude price exceeds $52 CAD per barrel. Any contingent payment received during the five-year period will be reflected as “Gain on dispositions” in our consolidated income statement. In the second quarter of 2018, we recorded a $50 million contingent payment.

Acquisition

In the second quarter of 2018, we obtained regulatory approvals for the agreement with Anadarko Petroleum Corporation to acquire its nonoperated interest in the Western North Slope of Alaska, as well as its interest in the Alpine pipeline. The transaction was completed in May 2018 for $386 million, after customary adjustments. These assets are included in our Alaska segment.

Other Planned Transactions

In July 2018, we entered into an agreement to sell a ConocoPhillips subsidiary to BP. The subsidiary will hold 16.5 percent of our 24 percent interest in the BP-operated Clair Field in the United Kingdom. Simultaneously, we entered into an agreement with BP to acquire their 39.2 percent nonoperated interest in the Greater

Kuparuk Area in Alaska, including their 38 percent interest in the Kuparuk Transportation Company (Kuparuk Assets). Both transactions are subject to regulatory approval. As of June 30, 2018, the net carrying value of our 16.5 percent interest in the Clair Field was approximately $933 million, consisting primarily of $1.525 billion of PP&E, $530 million of deferred tax liabilities, and $62 million of asset retirement obligations. The transactions are expected to close simultaneously in late 2018. Excluding customary adjustments, the transactions are expected to be cash neutral. Depending on the timing of regulatory approvals, we anticipate recognizing a noncash gain of between $0.5 billion to $1.0 billion on completion of the sale of the ConocoPhillips subsidiary holding 16.5 percent of the Clair Field, after customary adjustments and foreign exchange impacts. Results of operations for our interest in the Clair Field are reported within our Europe and North Africa segment and the Kuparuk Assets are included in our Alaska segment.

Note 6—Investments, Loans and Long-Term Receivables

APLNG

APLNG’s $8.5 billion project finance facility consists of financing agreements executed by APLNG with the Export-Import Bank of the United States for approximately $2.9 billion, the Export-Import Bank of China for approximately $2.7 billion, and a syndicate of Australian and international commercial banks for approximately $2.9 billion. All amounts have been drawn from the facility. APLNG made its first principal and interest repayment in March 2017 and will continue to make bi-annual payments until March 2029. At June 30, 2018, a balance of $7.5 billion was outstanding on the facility. See Note 12—Guarantees, for additional information.

APLNG is considered a VIE, as it has entered into certain contractual arrangements that provide it with additional forms of subordinated financial support. See Note 3—Variable Interest Entities (VIEs), for additional information.

During the first half of 2017, the outlook for crude oil prices deteriorated, and as a result of significantly reduced price outlooks, the estimated fair value of our investment in APLNG declined to an amount below carrying value. Based on a review of the facts and circumstances surrounding this decline in fair value, we concluded in the second quarter of 2017 the impairment was other than temporary under the guidance of FASB ASC Topic 323, “Investments—Equity Method and Joint Ventures,” and the recognition of an impairment of our investment to fair value was necessary. Accordingly, we recorded a noncash $2,384 million before- and after-tax impairment in our second-quarter 2017 results. Fair value was estimated based on an internal discounted cash flow model using estimated future production, an outlook of future prices from a combination of exchanges (short-term) and pricing service companies (long-term), costs, a market outlook of foreign exchange rates provided by a third party, and a discount rate believed to be consistent with those used by principal market participants. The impairment was included in the “Impairments” line on our consolidated income statement.

At June 30, 2018, the carrying value of our equity method investment in APLNG was $7,588 million. The balance is included in the “Investments and long-term receivables” line on our consolidated balance sheet.

Distributions from APLNG commenced in April 2018.

FCCL

On May 17, 2017, we completed the sale of our 50 percent nonoperated interest in the Foster Creek Christina Lake (FCCL) Partnership, as well as the majority of our western Canada gas assets to Cenovus Energy. For additional information on the Canada disposition and our investment in Cenovus Energy, see Note 5—Assets Held for Sale, Sold or Acquired and Other Planned Transactions and Note 7—Investment in Cenovus Energy.

Loans and Long-Term Receivables

As part of our normal ongoing business operations, and consistent with industry practice, we enter into numerous agreements with other parties to pursue business opportunities. Included in such activity are loans made to certain affiliated and non-affiliated companies. At June 30, 2018, significant loans to affiliated companies included $522 million in project financing to Qatar Liquefied Gas Company Limited (3) (QG3).

On our consolidated balance sheet, the long-term portion of these loans is included in the “Loans and advances—related parties” line, while the short-term portion is in the “Accounts and notes receivable—related parties” line.

Note 7-–Investment in Cenovus Energy

On May 17, 2017, we completed the sale of our 50 percent nonoperated interest in the FCCL Partnership, as well as the majority of our western Canada gas assets to Cenovus Energy. Consideration for the transaction included 208 million Cenovus Energy common shares, which approximated 16.9 percent of issued and outstanding Cenovus Energy common stock at closing. See Note 5—Assets Held for Sale, Sold or Acquired and Other Planned Transactions for additional information on the Canada disposition.

At closing, the fair value and cost basis of our investment in 208 million Cenovus Energy common shares was $1.96 billion based on a price of $9.41 per share on the New York Stock Exchange.

We adopted the provisions of ASU No. 2016-01, beginning January 1, 2018, using the cumulative-effect approach. Results for reporting periods beginning January 1, 2018, are presented under ASU No. 2016-01 with all changes in the fair value of our equity securities reflected within the “Other income” line of our consolidated income statement and within the “Other” line in the “Cash Flows From Operating Activities” section of our consolidated statement of cash flows. Prior period amounts are not adjusted under the cumulative-effect method of adopting ASU No. 2016-01. See Note 2—Changes in Accounting Principles and Note 16—Accumulated Other Comprehensive Loss for the effect on our consolidated balance sheet and the line items that have been impacted by the adoption of this standard.

The cumulative effect of applying the standard was the reclassification of accumulated unrealized holding losses of $58 million, recognized in 2017, related to our investment in Cenovus Energy from accumulated other comprehensive loss to retained earnings.

Our investment on our consolidated balance sheet as of June 30, 2018, is carried at fair value of $2.16 billion, reflecting the closing price of Cenovus Energy shares on the New York Stock Exchange of $10.38 per share, an increase of $383 million from $1.78 billion at the end of the first quarter of 2018 and an increase of $260 million from $1.90 billion at year-end 2017. This increase in fair value represents the net unrealized gain recorded during the first six months of 2018 related to the shares held at the reporting date. See Note 15—Fair Value Measurement, for additional information. Subject to market conditions, we intend to decrease our investment over time through market transactions, private agreements or otherwise.

Note 8—Suspended Wells

The capitalized cost of suspended wells at June 30, 2018, was $970 million, an increase of $117 million from $853 million at year-end 2017. No suspended wells were charged to dry hole expense during the first six months of 2018 relating to exploratory well costs capitalized for a period greater than one year as of December 31, 2017.

Note 9—Impairments

During the three- and six-month periods ended June 30, 2018 and 2017, we recognized before-tax impairment charges within the following segments:


	Millions of Dollars
	Three Months Ended June 30					Six Months Ended June 30
	2018			2017		2018			2017


Alaska	$	—			3		—			177
Lower 48		—			3,885		11			3,885
Canada		—			18		—			18
Europe and North Africa		(49	)		4		(48	)		5
Asia Pacific and Middle East		14			2,384		14			2,384

	$	(35	)		6,294		(23	)		6,469

In the three-month period ended June 30, 2018, we recorded a credit to impairment of $49 million in our Europe and North Africa segment primarily due to decreased ARO estimates on a certain field in the United Kingdom that has ceased production and was impaired in a prior year.

In the six-month period ended June 30, 2018, our Lower 48 segment included impairments of $11 million related to developed properties in our Barnett asset which were written down to fair value less costs to sell, partly offset by a revision to reflect finalized proceeds on a separate transaction. For additional information related to the status of our Barnett asset, see Note 5—Assets Held for Sale, Sold or Acquired and Other Planned Transactions.

In the three-month period ended June 30, 2017, our Lower 48 segment included impairments of $3.3 billion for our interests in the San Juan Basin and $0.6 billion for our interests in the Barnett, which were written down to fair value less costs to sell.

See the “APLNG” section of Note 6—Investments, Loans and Long-Term Receivables, for information on the impairment of our APLNG investment included within the Asia Pacific and Middle East segment during the three-month period ended June 30, 2017.

Additionally, in the six-month period ended June 30, 2017, our Alaska segment included an impairment of $174 million for the associated PP&E carrying value of our small interest in the Point Thomson Unit.

The charge discussed below is included in the “Exploration expenses” line on our consolidated income statement and is not reflected in the table above.

In the six-month period ended June 30, 2017, we recorded a before-tax impairment of $51 million in our Lower 48 segment for the associated carrying value of capitalized undeveloped leasehold costs of Shenandoah in deepwater Gulf of Mexico following the suspension of appraisal activity by the operator.

Note 10—Debt

On May 21, 2018, we refinanced our revolving credit facility from a total of $6.75 billion to $6.0 billion with a new expiration date of May 2023. Our revolving credit facility may be used for direct bank borrowings, the issuance of letters of credit totaling up to $500 million, or as support for our commercial paper program. The revolving credit facility is broadly syndicated among financial institutions and does not contain any material adverse change provisions or any covenants requiring maintenance of specified financial ratios or credit ratings. The facility agreement contains a cross-default provision relating to the failure to pay principal or interest on other debt obligations of $200 million or more by ConocoPhillips, or any of its consolidated subsidiaries.

Credit facility borrowings may bear interest at a margin above rates offered by certain designated banks in the London interbank market or at a margin above the overnight federal funds rate or prime rates offered by certain designated banks in the United States. The agreement calls for commitment fees on available, but unused, amounts. The agreement also contains early termination rights if our current directors or their approved successors cease to be a majority of our Board of Directors.

The revolving credit facility supports the ConocoPhillips Company $6.0 billion commercial paper program which is primarily a funding source for short-term working capital needs. Commercial paper maturities are generally limited to 90 days. We had no commercial paper outstanding in programs in place at June 30, 2018 or December 31, 2017. We had no direct outstanding borrowings or letters of credit under the revolving credit facility at June 30, 2018 and December 31, 2017. Since we had no commercial paper outstanding and had issued no letters of credit, we had access to $6.0 billion in borrowing capacity under our revolving credit facility at June 30, 2018.

In the first quarter of 2018, we redeemed or repurchased a total of $2,650 million of debt as described below:

•

4.20% Notes due 2021 with remaining principal of $1.0 billion.

•

2.875% Notes due 2021 with principal of $750 million.

•

2.2% Notes due 2020 with principal of $500 million.

•

8.125% Notes due 2030 with principal of $600 million (partial repurchase of $210 million).

•

7.8% Notes due 2027 with principal of $300 million (partial repurchase of $97 million).

•

7.9% Notes due 2047 with principal of $100 million (partial repurchase of $40 million).

•

9.125% Notes due 2021 with principal of $150 million (partial repurchase of $27 million).

•

8.20% Notes due 2025 with principal of $150 million (partial repurchase of $16 million).

•

7.65% Notes due 2023 with principal of $88 million (partial repurchase of $10 million).

In the second quarter of 2018, we repurchased a total of $1,800 million of debt as described below:

•

2.4% Notes due 2022 with principal of $1.0 billion (partial repurchase of $671 million).

•

3.35% Notes due 2024 with principal of $1.0 billion (partial repurchase of $574 million).

•

3.35% Notes due 2025 with principal of $500 million (partial repurchase of $301 million).

•

4.15% Notes due 2034 with principal of $500 million (partial repurchase of $254 million).

During the first six months of 2018, we incurred net premiums above book value to redeem or repurchase these debt instruments of $208 million.

In the second quarter of 2018, we also repaid the $250 million floating rate note due in 2018 at its natural maturity.

At June 30, 2018, we had $283 million of certain variable rate demand bonds (VRDBs) outstanding with maturities ranging through 2035. The VRDBs are redeemable at the option of the bondholders on any business day. The VRDBs are included in the “Long-term debt” line on our consolidated balance sheet.

Note 11—Noncontrolling Interests

Activity attributable to common stockholders’ equity and noncontrolling interests for the first six months of 2018 and 2017 was as follows:


	Millions of Dollars
	2018									2017
	Common Stockholders’ Equity			Non- Controlling Interest			Total Equity			Common Stockholders’ Equity			Non- Controlling Interest			Total Equity


Balance at January 1	$	30,607			194			30,801			34,974			252			35,226
Net income (loss)		2,528			26			2,554			(2,854	)		27			(2,827	)
Dividends		(675	)		—			(675	)		(662	)		—			(662	)
Repurchase of company common stock		(1,146	)		—			(1,146	)		(1,075	)		—			(1,075	)
Distributions to noncontrolling interests		—			(42	)		(42	)		—			(67	)		(67	)
Changes in Accounting Principles*		(220	)		—			(220	)
Other changes, net**		(52	)		2			(50	)		(97	)		1			(96	)

Balance at June 30	$	31,042			180			31,222			30,286			213			30,499

*See Note 2—Changes in Accounting Principles for additional information related to ASC Topic 606.

**Includes components of other comprehensive income, which are disclosed separately in our Consolidated Statement of Comprehensive Income.

Note 12—Guarantees

At June 30, 2018, we were liable for certain contingent obligations under various contractual arrangements as described below. We recognize a liability, at inception, for the fair value of our obligation as a guarantor for newly issued or modified guarantees. Unless the carrying amount of the liability is noted below, we have not recognized a liability because the fair value of the obligation is immaterial. In addition, unless otherwise stated, we are not currently performing with any significance under the guarantee and expect future performance to be either immaterial or have only a remote chance of occurrence.

APLNG Guarantees

At June 30, 2018, we had outstanding multiple guarantees in connection with our 37.5 percent ownership interest in APLNG. The following is a description of the guarantees with values calculated utilizing June 2018 exchange rates:

•

During the third quarter of 2016, we issued a guarantee to facilitate the withdrawal of our pro-rata portion of the funds in a project finance reserve account. We estimate the remaining term of this guarantee is 11 years. Our maximum exposure under this guarantee is approximately $190 million and may become payable if an enforcement action is commenced by the project finance lenders against APLNG. At June 30, 2018, the carrying value of this guarantee was approximately $14 million.

•

In conjunction with our original purchase of an ownership interest in APLNG from Origin Energy in October 2008, we agreed to reimburse Origin Energy for our share of the existing contingent liability arising under guarantees of an existing obligation of APLNG to deliver natural gas under several sales agreements with remaining terms of up to 24 years. Our maximum potential liability for future payments, or cost of volume delivery, under these guarantees is estimated to be $940 million ($1.62 billion in the event of intentional or reckless breach), and would become payable if APLNG fails to meet its obligations under these agreements and the obligations cannot otherwise be mitigated.

Future payments are considered unlikely, as the payments, or cost of volume delivery, would only be triggered if APLNG does not have enough natural gas to meet these sales commitments and if the co-venturers do not make necessary equity contributions into APLNG.

•

We have guaranteed the performance of APLNG with regard to certain other contracts executed in connection with the project’s continued development. The guarantees have remaining terms of up to 27 years or the life of the venture. Our maximum potential amount of future payments related to these guarantees is approximately $140 million and would become payable if APLNG does not perform.

Other Guarantees

We have other guarantees with maximum future potential payment amounts totaling approximately $780 million, which consist primarily of guarantees of the residual value of leased office buildings, guarantees of the residual value of leased corporate aircraft, and a guarantee for our portion of a joint venture’s project finance reserve accounts. These guarantees have remaining terms of up to five years and would become payable if, upon sale, certain asset values are lower than guaranteed amounts, business conditions decline at guaranteed entities, or as a result of nonperformance of contractual terms by guaranteed parties.

Indemnifications

Over the years, we have entered into agreements to sell ownership interests in certain corporations, joint ventures and assets that gave rise to qualifying indemnifications. These agreements include indemnifications for taxes, environmental liabilities, employee claims and litigation. The terms of these indemnifications vary greatly. The majority of these indemnifications are related to environmental issues, the term is generally indefinite and the maximum amount of future payments is generally unlimited. The carrying amount recorded for these indemnifications at June 30, 2018, was approximately $100 million. We amortize the indemnification liability over the relevant time period, if one exists, based on the facts and circumstances surrounding each type of indemnity. In cases where the indemnification term is indefinite, we will reverse the liability when we have information the liability is essentially relieved or amortize the liability over an appropriate time period as the fair value of our indemnification exposure declines. Although it is reasonably possible future payments may exceed amounts recorded, due to the nature of the indemnifications, it is not possible to make a reasonable estimate of the maximum potential amount of future payments. Included in the recorded carrying amount at June 30, 2018, were approximately $40 million of environmental accruals for known contamination that are included in the “Asset retirement obligations and accrued environmental costs” line on our consolidated balance sheet. For additional information about environmental liabilities, see Note 13—Contingencies and Commitments.

In 2012, we completed the separation of our downstream business, creating two independent energy companies: ConocoPhillips and Phillips 66. On March 1, 2015, a supplier to one of the refineries included in Phillips 66 as part of the separation of our downstream businesses formally registered Phillips 66 as a party to the supply agreement, thereby triggering a guarantee we provided at the time of separation. Our maximum potential liability for future payments under this guarantee, which would become payable if Phillips 66 does not perform its contractual obligations under the supply agreement, is approximately $1.24 billion. At June 30, 2018, the carrying value of this guarantee is approximately $98 million and the remaining term is six years. Because Phillips 66 has indemnified us for losses incurred under this guarantee, we have recorded an indemnification asset from Phillips 66 of approximately $98 million. The recorded indemnification asset amount represents the estimated fair value of the guarantee; however, if we are required to perform under the guarantee, we would expect to recover from Phillips 66 any amounts in excess of that value, provided Phillips 66 is a going concern.

Note 13—Contingencies and Commitments

A number of lawsuits involving a variety of claims arising in the ordinary course of business have been filed against ConocoPhillips. We also may be required to remove or mitigate the effects on the environment of the placement, storage, disposal or release of certain chemical, mineral and petroleum substances at various active and inactive sites. We regularly assess the need for accounting recognition or disclosure of these contingencies. In the case of all known contingencies (other than those related to income taxes), we accrue a liability when the loss is probable and the amount is reasonably estimable. If a range of amounts can be reasonably estimated and no amount within the range is a better estimate than any other amount, then the minimum of the range is accrued. We do not reduce these liabilities for potential insurance or third-party recoveries. If applicable, we accrue receivables for probable insurance or other third-party recoveries. With respect to income tax-related contingencies, we use a cumulative probability-weighted loss accrual in cases where sustaining a tax position is less than certain.

Based on currently available information, we believe it is remote that future costs related to known contingent liability exposures will exceed current accruals by an amount that would have a material adverse impact on our consolidated financial statements. As we learn new facts concerning contingencies, we reassess our position both with respect to accrued liabilities and other potential exposures. Estimates particularly sensitive to future changes include contingent liabilities recorded for environmental remediation, tax and legal matters. Estimated future environmental remediation costs are subject to change due to such factors as the uncertain magnitude of cleanup costs, the unknown time and extent of such remedial actions that may be required, and the determination of our liability in proportion to that of other responsible parties. Estimated future costs related to tax and legal matters are subject to change as events evolve and as additional information becomes available during the administrative and litigation processes.

Environmental

We are subject to international, federal, state and local environmental laws and regulations. When we prepare our consolidated financial statements, we record accruals for environmental liabilities based on management’s best estimates, using all information that is available at the time. We measure estimates and base liabilities on currently available facts, existing technology, and presently enacted laws and regulations, taking into account stakeholder and business considerations. When measuring environmental liabilities, we also consider our prior experience in remediation of contaminated sites, other companies’ cleanup experience, and data released by the U.S. Environmental Protection Agency (EPA) or other organizations. We consider unasserted claims in our determination of environmental liabilities, and we accrue them in the period they are both probable and reasonably estimable.

Although liability of those potentially responsible for environmental remediation costs is generally joint and several for federal sites and frequently so for other sites, we are usually only one of many companies cited at a particular site. Due to the joint and several liabilities, we could be responsible for all cleanup costs related to any site at which we have been designated as a potentially responsible party. We have been successful to date in sharing cleanup costs with other financially sound companies. Many of the sites at which we are potentially responsible are still under investigation by the EPA or the agency concerned. Prior to actual cleanup, those potentially responsible normally assess the site conditions, apportion responsibility and determine the appropriate remediation. In some instances, we may have no liability or may attain a settlement of liability. Where it appears that other potentially responsible parties may be financially unable to bear their proportional share, we consider this inability in estimating our potential liability, and we adjust our accruals accordingly. As a result of various acquisitions in the past, we assumed certain environmental obligations. Some of these environmental obligations are mitigated by indemnifications made by others for our benefit, and some of the indemnifications are subject to dollar limits and time limits.

We are currently participating in environmental assessments and cleanups at numerous federal Superfund and comparable state and international sites. After an assessment of environmental exposures for cleanup and other costs, we make accruals on an undiscounted basis (except those acquired in a purchase business combination, which we record on a discounted basis) for planned investigation and remediation activities for sites where it is probable future costs will be incurred and these costs can be reasonably estimated.

At June 30, 2018, our balance sheet included a total environmental accrual of $172 million, compared with $180 million at December 31, 2017, for remediation activities in the United States and Canada. We expect to incur a substantial amount of these expenditures within the next 30 years. In the future, we may be involved in additional environmental assessments, cleanups and proceedings.

Legal Proceedings

We are subject to various lawsuits and claims including but not limited to matters involving oil and gas royalty and severance tax payments, gas measurement and valuation methods, contract disputes, environmental damages, personal injury, and property damage. Our primary exposures for such matters relate to alleged royalty and tax underpayments on certain federal, state and privately owned properties and claims of alleged environmental contamination from historic operations. We will continue to defend ourselves vigorously in these matters.

Our legal organization applies its knowledge, experience and professional judgment to the specific characteristics of our cases, employing a litigation management process to manage and monitor the legal proceedings against us. Our process facilitates the early evaluation and quantification of potential exposures in individual cases. This process also enables us to track those cases that have been scheduled for trial and/or mediation. Based on professional judgment and experience in using these litigation management tools and available information about current developments in all our cases, our legal organization regularly assesses the adequacy of current accruals and determines if adjustment of existing accruals, or establishment of new accruals, is required.

Other Contingencies

We have contingent liabilities resulting from throughput agreements with pipeline and processing companies not associated with financing arrangements. Under these agreements, we may be required to provide any such company with additional funds through advances and penalties for fees related to throughput capacity not utilized. In addition, at June 30, 2018, we had performance obligations secured by letters of credit of $280 million (issued as direct bank letters of credit) related to various purchase commitments for materials, supplies, commercial activities and services incident to the ordinary conduct of business.

In 2007, we announced we had been unable to reach agreement with respect to our migration to an empresa mixta structure mandated by the Venezuelan government’s Nationalization Decree. As a result, Venezuela’s national oil company, Petróleos de Venezuela S.A. (PDVSA), or its affiliates, directly assumed control over ConocoPhillips’ interests in the Petrozuata and Hamaca heavy oil ventures and the offshore Corocoro development project. In response to this expropriation, we filed a request for international arbitration on November 2, 2007, with the World Bank’s International Centre for Settlement of Investment Disputes (ICSID). An arbitration hearing was held before an ICSID tribunal during the summer of 2010. On September 3, 2013, an ICSID arbitration tribunal held that Venezuela unlawfully expropriated ConocoPhillips’ significant oil investments in June 2007. On January 17, 2017, the Tribunal reconfirmed the decision that the expropriation was unlawful. A separate arbitration phase is currently proceeding to determine the damages owed to ConocoPhillips for Venezuela’s actions and a decision is expected later this year. In 2014, ConocoPhillips commenced a second arbitration under the rules of the International Chamber of Commerce (ICC) against PDVSA under the contracts that had established the Petrozuata and Hamaca projects (the Corocoro project is part of a separate ICC arbitration proceeding). In those proceedings, the ICC Tribunal ruled in April 2018 that PDVSA and two of its subsidiaries owed ConocoPhillips an indemnity of approximately $2.04 billion in connection with the expropriation of the projects and other pre-expropriation fiscal measures. In July 2018, the ICC Tribunal revised the amount as of the award date of April 25, 2018, to $1.93 billion, plus interest. Collection efforts are underway. In addition, ConocoPhillips brought fraudulent transfer actions in Delaware and New York, alleging that Venezuela and PDVSA have taken actions to improperly liquidate and expatriate assets from the United States to Venezuela in an effort to avoid judgment creditors.

In 2008, Burlington Resources, Inc., a wholly owned subsidiary of ConocoPhillips, initiated arbitration before ICSID against The Republic of Ecuador, challenging a windfall profits tax and subsequent expropriation of Blocks 7 and 21. On April 24, 2012, Ecuador filed environmental and infrastructure counterclaims against Burlington relating to the alleged impacts to Blocks 7 and 21. Ecuador also filed the environmental and

infrastructure counterclaims relating to Blocks 7 and 21 in a separate, parallel ICSID arbitration brought by Perenco Ecuador Limited, Burlington’s co-venturer and consortium operator. Perenco and Burlington each have joint liability for the counterclaims under their joint operating agreements. On December 14, 2012, the ICSID tribunal issued a decision in favor of Burlington, finding that Ecuador’s seizure of Blocks 7 and 21 was an unlawful expropriation in violation of the Ecuador-U.S. Bilateral Investment Treaty. In February 2017, the ICSID tribunal unanimously awarded Burlington $380 million for Ecuador’s unlawful expropriation and breach of the U.S.-Ecuador Bilateral Investment Treaty. The tribunal also issued a separate decision finding Ecuador to be entitled to $42 million for environmental and infrastructure impacts to Blocks 7 and 21. In December 2017, Burlington and Ecuador entered into a settlement agreement by which Ecuador agreed to pay Burlington $337 million in two installments. The first installment of $75 million was paid on December 1, 2017, and the second installment of $262 million was paid on April 13, 2018. The settlement includes an offset for the counterclaims decision, of which Burlington is entitled to a $24 million contribution from Perenco pursuant to the joint operating agreement. The ICSID arbitration between Perenco and Ecuador remains pending.

In December 2016, ConocoPhillips Angola filed a notice of arbitration against Sonangol E.P. under the Block 36 Production Sharing Contract relating to disputes arising thereunder. Earlier this year, the parties reached a confidential settlement.

In June 2017, FAR Ltd. initiated arbitration before the ICC against ConocoPhillips Senegal B.V. in connection with the sale of ConocoPhillips Senegal B.V. to Woodside Energy Holdings (Senegal) Limited in 2016. This arbitration is ongoing.

In 2017 and 2018, cities, counties, and/or state governments in California, New York, Washington, Rhode Island and Maryland have filed lawsuits against oil and gas companies, including ConocoPhillips, seeking compensatory damages and equitable relief to abate alleged climate change impacts. ConocoPhillips is vigorously defending against these lawsuits. The lawsuits brought by the City of San Francisco and the City of Oakland were recently dismissed by the United States District Court, Northern District of California and are subject to appeal. The lawsuit brought by the City of New York was recently dismissed by the United States District Court, Southern District of New York and is subject to appeal.

Note 14—Derivative and Financial Instruments

Derivative Instruments

We use futures, forwards, swaps and options in various markets to meet our customer needs and capture market opportunities. Our commodity business primarily consists of natural gas, crude oil, bitumen, LNG and natural gas liquids.

Our derivative instruments are held at fair value on our consolidated balance sheet. Where these balances have the right of setoff, they are presented on a net basis. Related cash flows are recorded as operating activities on our consolidated statement of cash flows. On our consolidated income statement, realized and unrealized gains and losses are recognized either on a gross basis if directly related to our physical business or a net basis if held for trading. Gains and losses related to contracts that meet and are designated with the normal purchase normal sale (NPNS) exception are recognized upon settlement. We generally apply this exception to eligible crude contracts. We do not use hedge accounting for our commodity derivatives.

The following table presents the gross fair values of our commodity derivatives, excluding collateral, and the line items where they appear on our consolidated balance sheet:


	Millions of Dollars
	June 30 2018		December 31 2017

Assets
Prepaid expenses and other current assets	$	268		275
Other assets		43		36
Liabilities
Other accruals		261		282
Other liabilities and deferred credits		35		28

The gains (losses) from commodity derivatives incurred, and the line items where they appear on our consolidated income statement were:


	Millions of Dollars
	Three Months Ended June 30						Six Months Ended June 30
	2018			2017			2018			2017


Sales and other operating revenues	$	(20	)		52			23			103
Other income		5			(1	)		9			—
Purchased commodities		24			(31	)		(3	)		(69	)


The table below summarizes our material net exposures resulting from outstanding commodity derivative contracts:

	Open Position Long/(Short)
	June 30 2018			December 31 2017

Commodity
Natural gas and power (billions of cubic feet equivalent)
Fixed price		(24	)		(29	)
Basis		(5	)		12

Foreign Currency Exchange Derivatives

We have foreign currency exchange rate risk resulting from international operations. Our foreign currency exchange derivative activity primarily relates to managing our cash-related and foreign currency exchange rate exposures, such as firm commitments for capital programs or local currency tax payments, dividends and cash returns from net investments in foreign affiliates, and investments in equity securities. We do not elect hedge accounting on our foreign currency exchange derivatives.

The following table presents the gross fair values of our foreign currency exchange derivatives, excluding collateral, and the line items where they appear on our consolidated balance sheet:


	Millions of Dollars
	June 30 2018		December 31 2017

Assets
Prepaid expenses and other current assets	$	7		1
Other assets		—		6
Liabilities
Other accruals		17		—
Other liabilities and deferred credits		—		15

In December 2017, we entered into foreign exchange zero cost collars buying the right to sell $1.25 billion CAD at $0.707 CAD and selling the right to buy $1.25 billion CAD at $0.842 CAD against the U.S. dollar.

The (gains) losses from foreign currency exchange derivatives incurred, and the line item where they appear on our consolidated income statement were:


	Millions of Dollars
	Three Months Ended June 30					Six Months Ended June 30
	2018		2017			2018			2017


Foreign currency transaction (gains) losses	$	2		(4	)		(3	)		3

We had the following net notional position of outstanding foreign currency exchange derivatives:

In Millions
Notional Currency

June 30

2018

December 31
2017

Foreign Currency Exchange Derivatives

Sell U.S. dollar, buy other currencies*

USD

757

—

Buy British pound, sell other currencies**

GBP

—

Sell British pound, buy other currencies**

GBP

—

Sell Canadian dollar, buy U.S. dollar

CAD

1,226

1,225

*Primarily British pound and Norwegian krone.

**Primarily euro.

Financial Instruments

We invest excess cash in financial instruments with maturities based on our cash forecasts for the various currency pools we manage. The maturities of these investments may from time to time extend beyond 90 days. The types of financial instruments that we currently invest include:

•

Time deposits: Interest bearing deposits placed with approved financial institutions.

•

Commercial paper: Unsecured promissory notes issued by a corporation, commercial bank or government agency purchased at a discount to mature at par.

These financial instruments appear in the “Cash and cash equivalents” line of our consolidated balance sheet if the maturities at the time we made the investments were 90 days or less; otherwise, these financial instruments are included in the “Short-term investments” line on our consolidated balance sheet.


	Millions of Dollars
	Carrying Amount
	Cash and Cash Equivalents				Short-Term Investments
	June 30		December 31		June 30		December 31
	2018		2017		2018		2017


Cash	$	842		948
Time deposits
Remaining maturities from 1 to 90 days		2,392		5,004		175		821
Commercial paper
Remaining maturities from 1 to 90 days		—		373		437		978
Remaining maturities from 91 to 180 days		—		—		—		74

	$	3,234		6,325		612		1,873

Credit Risk

Financial instruments potentially exposed to concentrations of credit risk consist primarily of cash equivalents, short-term investments, over-the-counter (OTC) derivative contracts and trade receivables. Our cash equivalents and short-term investments are placed in high-quality commercial paper, government money market funds, government debt securities and time deposits with major international banks and financial institutions.

The credit risk from our OTC derivative contracts, such as forwards, swaps and options, derives from the counterparty to the transaction. Individual counterparty exposure is managed within predetermined credit limits and includes the use of cash-call margins when appropriate, thereby reducing the risk of significant nonperformance. We also use futures, swaps and option contracts that have a negligible credit risk because these trades are cleared with an exchange clearinghouse and subject to mandatory margin requirements until settled; however, we are exposed to the credit risk of those exchange brokers for receivables arising from daily margin cash calls, as well as for cash deposited to meet initial margin requirements.

Our trade receivables result primarily from our petroleum operations and reflect a broad national and international customer base, which limits our exposure to concentrations of credit risk. The majority of these receivables have payment terms of 30 days or less, and we continually monitor this exposure and the creditworthiness of the counterparties. We do not generally require collateral to limit the exposure to loss; however, we will sometimes use letters of credit, prepayments and master netting arrangements to mitigate credit risk with counterparties that both buy from and sell to us, as these agreements permit the amounts owed by us or owed to others to be offset against amounts due to us.

Certain of our derivative instruments contain provisions that require us to post collateral if the derivative exposure exceeds a threshold amount. We have contracts with fixed threshold amounts and other contracts with variable threshold amounts that are contingent on our credit rating. The variable threshold amounts

typically decline for lower credit ratings, while both the variable and fixed threshold amounts typically revert to zero if we fall below investment grade. Cash is the primary collateral in all contracts; however, many also permit us to post letters of credit as collateral, such as transactions administered through the New York Mercantile Exchange.

The aggregate fair value of all derivative instruments with such credit risk-related contingent features that were in a liability position on June 30, 2018 and December 31, 2017, was $35 million and $55 million, respectively. For these instruments, no collateral was posted as of June 30, 2018 or December 31, 2017. If our credit rating had been downgraded below investment grade on June 30, 2018, we would be required to post $35 million of additional collateral, either with cash or letters of credit.

Note 15—Fair Value Measurement

We carry a portion of our assets and liabilities at fair value that are measured at a reporting date using an exit price (i.e., the price that would be received to sell an asset or paid to transfer a liability) and disclosed according to the quality of valuation inputs under the following hierarchy:

•

Level 1: Quoted prices (unadjusted) in an active market for identical assets or liabilities.

•

Level 2: Inputs other than quoted prices that are directly or indirectly observable.

•

Level 3: Unobservable inputs that are significant to the fair value of assets or liabilities.

The classification of an asset or liability is based on the lowest level of input significant to its fair value. Those that are initially classified as Level 3 are subsequently reported as Level 2 when the fair value derived from unobservable inputs is inconsequential to the overall fair value, or if corroborated market data becomes available. Assets and liabilities initially reported as Level 2 are subsequently reported as Level 3 if corroborated market data is no longer available. Transfers occur at the end of the reporting period. At the end of the fourth quarter of 2017, our investment in Cenovus Energy transferred from Level 2 to Level 1 due to the lapsing of trading restrictions. There were no other material transfers between levels during 2018 or 2017.

Recurring Fair Value Measurement

Financial assets and liabilities reported at fair value on a recurring basis primarily include our investment in Cenovus Energy shares and commodity derivatives. Level 1 derivative assets and liabilities primarily represent exchange-traded futures and options that are valued using unadjusted prices available from the underlying exchange. Level 1 also includes our investment in common shares of Cenovus Energy, which is valued using quotes for shares on the New York Stock Exchange. Level 2 derivative assets and liabilities primarily represent OTC swaps, options and forward purchase and sale contracts that are valued using adjusted exchange prices, prices provided by brokers or pricing service companies that are all corroborated by market data. Level 3 derivative assets and liabilities consist of OTC swaps, options and forward purchase and sale contracts where a significant portion of fair value is calculated from underlying market data that is not readily available. The derived value uses industry standard methodologies that may consider the historical relationships among various commodities, modeled market prices, time value, volatility factors and other relevant economic measures. The use of these inputs results in management’s best estimate of fair value. Level 3 activity was not material for all periods presented.

The following table summarizes the fair value hierarchy for gross financial assets and liabilities (i.e., unadjusted where the right of setoff exists for commodity derivatives accounted for at fair value on a recurring basis):


	Millions of Dollars
	June 30, 2018								December 31, 2017
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total

Assets
Investment in Cenovus Energy	$	2,159		—		—		2,159		1,899		—		—		1,899
Commodity derivatives		190		100		21		311		175		106		30		311

Total assets	$	2,349		100		21		2,470		2,074		106		30		2,210


Liabilities
Commodity derivatives	$	174		101		21		296		158		111		41		310

Total liabilities	$	174		101		21		296		158		111		41		310

The following table summarizes those commodity derivative balances subject to the right of setoff as presented on our consolidated balance sheet. We have elected to offset the recognized fair value amounts for multiple derivative instruments executed with the same counterparty in our financial statements when a legal right of setoff exists.


	Millions of Dollars
	Gross Amounts Recognized		Gross Amounts Offset		Net Amounts Presented		Cash Collateral		Gross Amounts without Right of Setoff		Net Amounts

June 30, 2018
Assets	$	311		214		97		3		7		87
Liabilities		296		214		82		4		5		73


December 31, 2017
Assets	$	311		186		125		—		4		121
Liabilities		310		186		124		7		5		112

At June 30, 2018 and December 31, 2017, we did not present any amounts gross on our consolidated balance sheet where we had the right of setoff.

Non-Recurring Fair Value Measurement

The following table summarizes the fair value hierarchy by major category and date of remeasurement for assets accounted for at fair value on a non-recurring basis:

Millions of Dollars

Fair Value
Measurements Using

Fair Value

Level 3
Inputs

Before-

Tax Loss

Net PP&E (held for sale)

March 31, 2018

250

During the first quarter of 2018, net PP&E held for sale was written down to fair value, less costs to sell. The fair value was estimated using information gathered during marketing efforts. For additional information, see Note 5—Assets Held for Sale, Sold or Acquired and Other Planned Transactions.

Reported Fair Values of Financial Instruments

We used the following methods and assumptions to estimate the fair value of financial instruments:

•

Cash and cash equivalents and short-term investments: The carrying amount reported on the balance sheet approximates fair value.

•

Accounts and notes receivable (including long-term and related parties): The carrying amount reported on the balance sheet approximates fair value. The valuation technique and methods used to estimate the fair value of the current portion of fixed-rate related party loans is consistent with Loans and advances—related parties.

•

Investment in Cenovus Energy shares: See Note 7—Investment in Cenovus Energy, for a discussion of the carrying value and fair value of our investment in Cenovus Energy shares.

•

Loans and advances—related parties: The carrying amount of floating-rate loans approximates fair value. The fair value of fixed-rate loan activity is measured using market observable data and is categorized as Level 2 in the fair value hierarchy. See Note 6—Investments, Loans and Long-Term Receivables, for additional information.

•

Accounts payable (including related parties) and floating-rate debt: The carrying amount of accounts payable and floating-rate debt reported on the balance sheet approximates fair value.

•

Fixed-rate debt: The estimated fair value of fixed-rate debt is measured using prices available from a pricing service that is corroborated by market data; therefore, these liabilities are categorized as Level 2 in the fair value hierarchy.


The following table summarizes the net fair value of financial instruments (i.e., adjusted where the right of setoff exists for commodity derivatives):

	Millions of Dollars
	Carrying Amount				Fair Value
	June 30		December 31		June 30		December 31
	2018		2017		2018		2017

Financial assets
Investment in Cenovus Energy	$	2,159		1,899		2,159		1,899
Commodity derivatives		94		125		94		125
Total loans and advances—related parties		528		586		528		586
Financial liabilities
Total debt, excluding capital leases		14,204		18,929		16,581		22,435
Commodity derivatives		78		117		78		117

Note 16—Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss in the equity section of our consolidated balance sheet included:


	Millions of Dollars
	Defined Benefit Plans			Net Unrealized Loss on Securities			Foreign Currency Translation			Accumulated Other Comprehensive Income (Loss)


December 31, 2017	$	(400	)		(58	)		(5,060	)		(5,518	)
Cumulative effect of adopting ASU No. 2016-01*		—			58			—			58
Other comprehensive income (loss)		104			—			(281	)		(177	)

June 30, 2018	$	(296	)		—			(5,341	)		(5,637	)

*See Note 2—Changes in Accounting Principles for additional information.

There were no items within accumulated other comprehensive loss related to noncontrolling interests.

The following table summarizes reclassifications out of accumulated other comprehensive loss:

Millions of Dollars

Three Months Ended
June 30

Six Months Ended
June 30

2018

2017

2018

2017

Defined benefit plans

127

138

The above amounts are included in the computation of net periodic benefit cost and are presented net of tax expense of $34 million and $20 million for the three months ended June 30, 2018 and June 30, 2017, respectively, and $37 million and $47 million for the six-month periods ended June 30, 2018 and June 30, 2017, respectively. See Note 18—Employee Benefit Plans, for additional information.

Note 17—Cash Flow Information


	Millions of Dollars
	Six Months Ended June 30
	2018			2017

Cash Payments
Interest	$	405			676
Income taxes		1,307			337


Net Sales (Purchases) of Short-Term Investments
Short-term investments purchased	$	(831	)		(2,952	)
Short-term investments sold		2,088			299

	$	1,257			(2,653	)

Note 18—Employee Benefit Plans

Pension and Postretirement Plans


	Millions of Dollars
	Pension Benefits												Other Benefits
	2018						2017						2018			2017

	U.S.			Int’l.			U.S.			Int’l.

Components of Net Periodic Benefit Cost
Three Months Ended June 30
Service cost	$	22			22			23			20			1			1
Interest cost		27			27			29			25			2			2
Expected return on plan assets		(35	)		(40	)		(31	)		(39	)		—			—
Amortization of prior service cost (credit)		—			(2	)		1			(2	)		(8	)		(9	)
Recognized net actuarial loss (gain)		16			9			17			12			(1	)		—
Settlements		147			—			37			—			—			—

Net periodic benefit cost	$	177			16			76			16			(6	)		(6	)


Six Months Ended June 30
Service cost	$	43			43			46			39			1			1
Interest cost		54			54			61			51			4			4
Expected return on plan assets		(69	)		(80	)		(65	)		(78	)		—			—
Amortization of prior service cost (credit)		—			(3	)		2			(3	)		(17	)		(18	)
Recognized net actuarial loss (gain)		31			18			36			24			(1	)		(1	)
Settlements		147			—			97			—			—			—

Net periodic benefit cost	$	206			32			177			33			(13	)		(14	)

The components of net periodic benefit cost, other than the service cost component, are included in the “Other expenses” line item on our consolidated income statement.

During the first six months of 2018, we contributed $130 million to our domestic benefit plans and $85 million to our international benefit plans. In 2018, we expect to contribute approximately $170 million to our domestic qualified and nonqualified pension and postretirement benefit plans and $150 million to our international qualified and nonqualified pension and postretirement benefit plans.

During the three-month period ended June 30, 2018, we purchased a group annuity contract from Prudential and transferred approximately $700 million of future benefit obligations from the U.S. qualified pension plan to Prudential. The purchase of the group annuity contract was funded directly by plan assets of the U.S. qualified pension plan.

During the three-month period ended June 30, 2018, lump-sum benefit payments exceeded the sum of service and interest costs for the fiscal year for the U.S. qualified pension plan. As a result, we recognized a proportionate share of prior actuarial losses from other comprehensive income as pension settlement expense of $147 million. In conjunction with the recognition of pension settlement expense, the fair market values of the U.S. qualified pension plan assets were updated, and the pension benefit obligation of the U.S. qualified pension plan was remeasured as of June 30, 2018. At the measurement date, the net pension liability increased by $42 million as a result of a loss on U.S. qualified pension plan assets, offset by a gain on the projected benefit obligation due primarily to an increase in the discount rate from 3.6 percent to 4.2 percent, resulting in a corresponding decrease to other comprehensive income.

Severance Accrual

The following table summarizes our severance accrual activity for the six-month period ended June 30, 2018:


	Millions of Dollars

Balance at December 31, 2017	$	53
Accruals		30
Benefit payments		(28	)

Balance at June 30, 2018	$	55

Of the remaining balance at June 30, 2018, $35 million is classified as short term.

Note 19—Related Party Transactions

Our related parties primarily include equity method investments and certain trusts for the benefit of employees.

Significant transactions with our equity affiliates were:


	Millions of Dollars
	Three Months Ended June 30						Six Months Ended June 30
	2018			2017			2018			2017


Operating revenues and other income	$	24			30			47			59
Purchases		25			25			49			48
Operating expenses and selling, general and administrative expenses		16			14			31			26
Net interest (income) expense*		(4	)		(3	)		(7	)		(6	)

*	We paid interest to, or received interest from, various affiliates. See Note 6—Investments, Loans and Long-Term Receivables, for additional information on loans to affiliated companies.

Note 20—Sales and Other Operating Revenues

Transitional Arrangements

We adopted the provisions of ASC Topic 606 beginning January 1, 2018, using the modified retrospective approach, which we have applied to contracts within the scope of the standard that had not been completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018, are presented under ASC Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with ASC Topic 605. See Note 2—Changes in Accounting Principles for the effect on our consolidated balance sheet and the line items which have been impacted by the adoption of this standard.

The cumulative effect of applying the standard relates solely to certain licensing arrangements where revenue was previously recognized ($61 million in 2011, $146 million in 2015 and $44 million in 2017) based on contractual milestones. Under ASC Topic 606, such revenues are recognized when the customer has the ability to utilize and benefit from its right to use the license. As a result, such historically recognized revenues must be reversed through a cumulative effect adjustment and deferred until such time when the customer has the ability to utilize and benefit from the license. The cumulative effect adjustment relates to contracts that were not substantially completed at the date of implementation.

Accounting Policy

Revenues associated with the sales of crude oil, bitumen, natural gas, LNG, natural gas liquids and other items are recognized at the point in time when the customer obtains control of the asset. In evaluating when a customer has control of the asset, we primarily consider whether the transfer of legal title and physical delivery has occurred, whether the customer has significant risks and rewards of ownership, and whether the customer has accepted delivery and a right to payment exists. These products are typically sold at prevailing market prices. We allocate variable market-based consideration to deliveries (performance obligations) in the current period as that consideration relates specifically to our efforts to transfer control of current period deliveries to the customer and represents the amount we expect to be entitled to in exchange for the related products. Payment is typically due within 30 days or less.

Practical Expedients

Typically, our commodity sales contracts are less than 12 months in duration; however, certain commodity sales contracts may carry a longer duration, which may extend to the end of field life. We have long-term commodity sales contracts which use prevailing market prices at the time of delivery, and under these contracts, the market-based variable consideration for each performance obligation (i.e., delivery of commodity) is allocated to each wholly unsatisfied performance obligation within the contract. Accordingly, we have applied the practical expedient allowed in ASC Topic 606 and do not disclose the aggregate amount of the transaction price allocated to performance obligations or when we expect to recognize revenues that are unsatisfied (or partially unsatisfied) as of the end of the reporting period.

Revenue from Contracts with Customers

The following table provides further disaggregation of our consolidated sales and other operating revenues:


	Millions of Dollars
	Three Months Ended June 30					Six Months Ended June 30
	2018		2017*			2018		2017*


Revenue from contracts with customers	$	6,743		4,634			13,288		9,792
Revenue from contracts outside the scope of ASC Topic 606
Physical contracts meeting the definition of a derivative		1,719		2,156			3,980		4,581
Financial derivative contracts		42		(9	)		34		(74	)

Consolidated sales and other operating revenues	$	8,504		6,781			17,302		14,299

*Under the modified retrospective approach, prior period amounts have not been adjusted upon adoption of ASC Topic 606.

Revenues from contracts outside the scope of ASC Topic 606 relate primarily to physical gas contracts at market prices which qualify as derivatives accounted for under ASC Topic 815, “Derivatives and Hedging,” and for which we have not elected NPNS. There is no significant difference in contractual terms or the policy for recognition of revenue from these contracts and those within the scope of ASC Topic 606. The following disaggregation of revenues is provided in conjunction with Note 21—Segment Disclosures and Related Information:

Millions of Dollars

Three Months Ended
June 30

Six Months Ended
June 30

2018

2017*

2018

2017*

Revenue from Outside the Scope of ASC Topic 606 by Segment

Lower 48

1,300

1,544

3,013

3,271

Canada

240

287

519

Europe and North Africa

323

372

680

791

Physical contracts meeting the definition of a derivative

1,719

2,156

3,980

4,581

*Under the modified retrospective approach, prior period amounts have not been adjusted upon adoption of ASC Topic 606.

Millions of Dollars

Three Months Ended
June 30

Six Months Ended
June 30

2018

2017*

2018

2017*

Revenue from Outside the Scope of ASC Topic 606 by Product

Crude oil

290

218

576

359

Natural gas

1,363

1,865

3,253

4,059

Other

151

163

Physical contracts meeting the definition of a derivative

1,719

2,156

3,980

4,581

*Under the modified retrospective approach, prior period amounts have not been adjusted upon adoption of ASC Topic 606.

Receivables and Contract Liabilities

Receivables from Contracts with Customers

At June 30, 2018, the “Accounts and notes receivable” line on our consolidated balance sheet, included trade receivables of $2,499 million compared with $2,675 million at December 31, 2017, and included both contracts with customers within the scope of ASC Topic 606 and those that are outside the scope of ASC Topic 606. We typically receive payment within 30 days or less (depending on the terms of the invoice) once delivery is made. Revenues that are outside the scope of ASC Topic 606 relate primarily to physical gas sales contracts at market prices for which we do not elect NPNS and are therefore accounted for as a derivative under ASC Topic 815. There is little distinction in the nature of the customer or credit quality of trade receivables associated with gas sold under contracts for which NPNS has not been elected compared to trade receivables where NPNS has been elected.

Contract Liabilities from Contracts with Customers

We have entered into contractual arrangements where we license proprietary technology to customers related to the optimization process for operating LNG plants. The agreements typically provide for negotiated payments to be made at stated milestones. The payments are not directly related to our performance under the contract and are recorded as deferred revenue to be recognized as revenue when the customer can utilize and benefit from their right to use the license. Payments are received in installments over the construction period.


	Millions of Dollars
Contract Liabilities
At January 1, 2018	$	251
Contractual payments received		67
Revenue recognized		(75	)

At June 30, 2018	$	243


Amounts Recognized in the Consolidated Balance Sheet at June 30, 2018
Current liabilities	$	157
Noncurrent liabilities		86

	$	243

Revenue of $75 million was recognized during the three-month period ended June 30, 2018, and is presented within sales and other operating revenues. We expect to recognize the contract liabilities as of June 30, 2018, as revenue between the remainder of 2018 and 2022 as construction is completed.

Prior to the adoption of ASC Topic 606, contractual cash payments received would have been recognized as sales and other operating revenues when received.

Note 21—Segment Disclosures and Related Information

We explore for, produce, transport and market crude oil, bitumen, natural gas, LNG and natural gas liquids on a worldwide basis. We manage our operations through six operating segments, which are primarily defined by geographic region: Alaska, Lower 48, Canada, Europe and North Africa, Asia Pacific and Middle East, and Other International.

Corporate and Other represents costs not directly associated with an operating segment, such as most interest expense, corporate overhead and certain technology activities, including licensing revenues. Corporate assets include all cash and cash equivalents and short-term investments.

We evaluate performance and allocate resources based on net income (loss) attributable to ConocoPhillips. Intersegment sales are at prices that approximate market.

Analysis of Results by Operating Segment


	Millions of Dollars
	Three Months Ended June 30						Six Months Ended June 30
	2018			2017*			2018			2017*

Sales and Other Operating Revenues
Alaska	$	1,403			1,071			2,788			2,078

Lower 48		3,852			3,090			7,804			6,320
Intersegment eliminations		(1	)		(2	)		(4	)		(5	)

Lower 48		3,851			3,088			7,800			6,315

Canada		810			788			1,701			1,658
Intersegment eliminations		(290	)		(89	)		(545	)		(175	)

Canada		520			699			1,156			1,483

Europe and North Africa		1,644			1,011			3,252			2,454
Asia Pacific and Middle East		1,006			896			2,222			1,918
Corporate and Other		80			16			84			51

Consolidated sales and other operating revenues	$	8,504			6,781			17,302			14,299


Sales and Other Operating Revenues by Geographic Location
United States	$	5,256			4,162			10,592			8,402
Australia		303			344			743			727
Canada		520			699			1,156			1,483
China		136			158			354			363
Indonesia		213			164			428			363
Libya**		262			93			538			224
Malaysia		356			234			700			471
Norway		715			479			1,378			1,168
United Kingdom		668			439			1,337			1,061
Other foreign countries		75			9			76			37

Worldwide consolidated	$	8,504			6,781			17,302			14,299


Sales and Other Operating Revenues by Product
Crude Oil	$	4,776			3,151			9,226			6,441
Natural gas		2,294			2,531			5,090			5,453
Natural gas liquids		265			219			496			507
Other***		1,169			880			2,490			1,898

Consolidated sales and other operating revenues by product	$	8,504			6,781			17,302			14,299

*Under the modified retrospective approach, prior period amounts have not been adjusted upon adoption of ASC Topic 606.
**Included in “Other foreign countries” in prior periods.
***Includes LNG and bitumen.


Net Income (Loss) Attributable to ConocoPhillips
Alaska	$	418		199		942		188
Lower 48		410		(2,536	)	718		(2,898	)
Canada		33		1,379		(32	)	2,327
Europe and North Africa		290		123		535		294
Asia Pacific and Middle East		466		(2,172	)	927		(1,936	)
Other International		(5	)	(9	)	(49	)	(57	)
Corporate and Other		28		(424	)	(513	)	(772	)

Consolidated net income (loss) attributable to ConocoPhillips	$	1,640		(3,440	)	2,528		(2,854	)


	Millions of Dollars
	June 30 2018		December 31 2017

Total Assets
Alaska	$	12,758		12,108
Lower 48		14,890		14,632
Canada		5,897		6,214
Europe and North Africa		11,633		11,870
Asia Pacific and Middle East		16,485		16,985
Other International		62		97
Corporate and Other		7,211		11,456

Consolidated total assets	$	68,936		73,362

Note 22—Income Taxes

Our effective tax rates for the three- and six-month periods ended June 30, 2018, were 37 percent and 42 percent, respectively, compared with 21 percent and 38 percent for the same periods of 2017. The amounts of U.S. and foreign income (loss) from continuing operations before income taxes, with a reconciliation of tax at the federal statutory rate with the provision for income taxes were:


	Millions of Dollars												Percent of Pre-Tax Income (Loss)
	Three Months Ended June 30						Six Months Ended June 30						Three Months Ended June 30						Six Months Ended June 30
	2018			2017			2018			2017			2018			2017			2018			2017

Income (loss) before income taxes
United States	$	1,119			(4,269	)		1,905			(5,063	)		42.7	%		97.9			43.3			110.2
Foreign		1,500			(92	)		2,490			470			57.3			2.1			56.7			(10.2	)

	$	2,619			(4,361	)		4,395			(4,593	)		100.0	%		100.0			100.0			100.0


Federal statutory income tax	$	550			(1,526	)		923			(1,608	)		21.0	%		35.0			21.0			35.0
Non-U.S. effective tax rates		418			69			861			335			16.0			(1.6	)		19.6			(7.3	)
Canada disposition		—			(172	)		—			(1,168	)		—			3.9			—			25.4
Recovery of outside basis		(3	)		(4	)		(3	)		(839	)		(0.1	)		0.1			(0.1	)		18.3
Adjustment to tax reserves		4			—			4			822			0.2			—			0.1			(17.9	)
Adjustment to valuation allowance		(15	)		—			42			24			(0.6	)		—			1.0			(0.5	)
APLNG impairment		—			834			—			834			—			(19.1	)		—			(18.2	)
State income tax		26			(99	)		45			(112	)		1.0			2.3			1.0			2.4
Enhanced oil recovery credit		(17	)		(29	)		(37	)		(45	)		(0.7	)		0.7			(0.8	)		1.0
Other		2			(8	)		6			(9	)		—			0.1			0.1			0.2

	$	965			(935	)		1,841			(1,766	)		36.8	%		21.4			41.9			38.4

The effective tax rate represents a blend of federal, state and foreign taxes and includes the impact of certain nondeductible items and adjustments to our valuation allowance. The effective tax rate for the six months ended June 30, 2018, also reflects the reduced federal corporate income tax rate as a result of the enactment of the Tax Cuts and Jobs Act (the Tax Legislation) in December 2017 and the impact of a change in the mix of our domestic and foreign earnings.

Our effective tax rate for the second quarter and six-month periods ended June 30, 2017, was favorably impacted by tax benefits of $172 million and $1,168 million, respectively, associated with our 2017 disposition of various assets in Canada. This tax benefit was primarily associated with a deferred tax recovery related to the Canadian capital gains exclusion component of the 2017 Canada disposition and the recognition of previously unrealizable Canadian capital asset tax basis. The Canada disposition, along with the associated restructuring of our Canadian operations, may generate an additional tax benefit of $822 million. However,

since we believe it is not likely we will receive a corresponding cash tax savings, this $822 million benefit has been offset by a full tax reserve.

The impairment of our APLNG investment in the second quarter of 2017 did not generate a tax benefit. See the “APLNG” section of Note 6—Investments, Loans and Long-Term Receivables, for information on the impairment of our APLNG investment.

We have not significantly revised the tax accounting impacts of our 2017 provisional estimates under Staff Accounting Bulletin 118 and ASU No. 2018-05, “Income Taxes” (Topic 740), but we are continuing to gather information and are waiting for further guidance from the Internal Revenue Service, Securities Exchange Commission and FASB on the Tax Legislation.

The Tax Legislation subjects a U.S. shareholder to tax on Global Intangible Low-Taxed Income (GILTI) earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740, No. 5, “Accounting for Global Intangible Low-Taxed Income,” states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only. Given the complexity of the GILTI provisions, we are still evaluating the effects of the GILTI provisions and have not yet determined our accounting policy. At June 30, 2018, the current year U.S. income tax impact related to GILTI activities is immaterial.

Note 23—New Accounting Standards

In February 2016, the FASB issued ASU No. 2016-02, “Leases” (ASU No. 2016-02), which establishes comprehensive accounting and financial reporting requirements for leasing arrangements. This ASU supersedes the existing requirements in FASB ASC Topic 840, “Leases,” and requires lessees to recognize substantially all lease assets and lease liabilities on the balance sheet. The provisions of ASU No. 2016-02 also modify the definition of a lease and outline requirements for recognition, measurement, presentation and disclosure of leasing arrangements by both lessees and lessors. The ASU is effective for interim and annual periods beginning after December 15, 2018, and early adoption of the standard is permitted. Entities are required to adopt the ASU using a modified retrospective approach, subject to certain optional practical expedients, and apply the provisions of ASU No. 2016-02 to leasing arrangements existing at or entered into after the earliest comparative period presented in the financial statements. ASU No. 2016-02 was amended in January 2018 by the provisions of ASU No. 2018-01, “Land Easement Practical Expedient for Transition to Topic 842,” and in July 2018 by the provisions of ASU No. 2018-10, “Codification Improvements to Topic 842, Leases,” and ASU No. 2018-11, “Targeted Improvements.” We plan to adopt ASU No. 2016-02, as amended, effective January 1, 2019, and continue to evaluate the ASU to determine the impact of adoption on our consolidated financial statements and disclosures, accounting policies and systems, business processes, and internal controls. We are currently implementing a third-party lease accounting software solution to facilitate the ongoing accounting and financial reporting requirements of the ASU. We also continue to monitor proposals issued by the FASB to clarify the ASU and certain industry implementation issues. While our evaluation of ASU No. 2016-02 and related implementation activities are ongoing, we expect the adoption of the ASU to have a material impact on our consolidated financial statements and disclosures. We also expect the adoption of ASU No. 2016-02 to result in certain changes being made to our existing accounting policies and systems, business processes, and internal controls.

In June 2016, the FASB issued ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments” (ASU No. 2016-13), which sets forth the current expected credit loss model, a new forward-looking impairment model for certain financial instruments based on expected losses rather than incurred losses. The ASU is effective for interim and annual periods beginning after December 15, 2019, and early adoption of the standard is permitted. Entities are required to adopt ASU No. 2016-13 using a modified retrospective approach, subject to certain limited exceptions. We are currently evaluating the impact of the adoption of this ASU.

Supplementary Information—Condensed Consolidating Financial Information

We have various cross guarantees among ConocoPhillips, ConocoPhillips Company and ConocoPhillips Canada Funding Company I, with respect to publicly held debt securities. ConocoPhillips Company is 100 percent owned by ConocoPhillips. ConocoPhillips Canada Funding Company I is an indirect, 100 percent owned subsidiary of ConocoPhillips Company. ConocoPhillips and/or ConocoPhillips Company have fully and unconditionally guaranteed the payment obligations of ConocoPhillips Canada Funding Company I, with respect to its publicly held debt securities. Similarly, ConocoPhillips has fully and unconditionally guaranteed the payment obligations of ConocoPhillips Company with respect to its publicly held debt securities. In addition, ConocoPhillips Company has fully and unconditionally guaranteed the payment obligations of ConocoPhillips with respect to its publicly held debt securities. All guarantees are joint and several. The following condensed consolidating financial information presents the results of operations, financial position and cash flows for:

•

ConocoPhillips, ConocoPhillips Company and ConocoPhillips Canada Funding Company I (in each case, reflecting investments in subsidiaries utilizing the equity method of accounting).

•

All other nonguarantor subsidiaries of ConocoPhillips.

•

The consolidating adjustments necessary to present ConocoPhillips’ results on a consolidated basis.

In March 2018, ConocoPhillips Company received a $1.2 billion loan repayment from a nonguarantor subsidiary to settle certain accumulated intercompany balances. This transaction had no impact on our consolidated financial statements.

In June 2018, ConocoPhillips received a $2.5 billion return of capital from ConocoPhillips Company to settle certain accumulated intercompany balances. The transaction had no impact on our consolidated financial statements.

In the second quarter of 2018, ConocoPhillips Company received $1.2 billion of loan repayments from a nonguarantor subsidiary to settle certain accumulated intercompany balances. This transaction had no impact on our consolidated financial statements.

This condensed consolidating financial information should be read in conjunction with the accompanying consolidated financial statements and notes.


	Millions of Dollars
	Three Months Ended June 30, 2018
Income Statement	ConocoPhillips			ConocoPhillips Company			ConocoPhillips Canada Funding Company I			All Other Subsidiaries			Consolidating Adjustments			Total Consolidated
Revenues and Other Income
Sales and other operating revenues	$	—			3,680			—			4,824			—			8,504
Equity in earnings of affiliates		1,705			1,733			—			326			(3,499	)		265
Gain on dispositions		—			—			—			55			—			55
Other income		—			394			—			22			—			416
Intercompany revenues		10			34			43			1,404			(1,491	)		—

Total Revenues and Other Income		1,715			5,841			43			6,631			(4,990	)		9,240


Costs and Expenses
Purchased commodities		—			3,281			—			1,128			(1,345	)		3,064
Production and operating expenses		—			253			—			1,064			(4	)		1,313
Selling, general and administrative expenses		1			81			—			36			—			118
Exploration expenses		—			38			—			31			—			69
Depreciation, depletion and amortization		—			143			—			1,295			—			1,438
Impairments		—			(1	)		—			(34	)		—			(35	)
Taxes other than income taxes		—			28			—			245			—			273
Accretion on discounted liabilities		—			5			—			84			—			89
Interest and debt expense		76			141			36			66			(142	)		177
Foreign currency transaction (gains) losses		16			—			(58	)		14			—			(28	)
Other expenses		—			148			—			(5	)		—			143

Total Costs and Expenses		93			4,117			(22	)		3,924			(1,491	)		6,621

Income before income taxes		1,622			1,724			65			2,707			(3,499	)		2,619
Income tax provision (benefit)		(18	)		19			3			961			—			965

Net income		1,640			1,705			62			1,746			(3,499	)		1,654
Less: net income attributable to noncontrolling interests		—			—			—			(14	)		—			(14	)

Net Income Attributable to ConocoPhillips	$	1,640			1,705			62			1,732			(3,499	)		1,640


Comprehensive Income Attributable to ConocoPhillips	$	1,374			1,439			7			1,377			(2,823	)		1,374


Income Statement	Three Months Ended June 30, 2017*
Revenues and Other Income
Sales and other operating revenues	$	—			2,954			—			3,827			—			6,781
Equity in earnings (losses) of affiliates		(3,235	)		(2,297	)		—			153			5,557			178
Gain on dispositions		—			16			—			1,860			—			1,876
Other income		1			13			—			33			—			47
Intercompany revenues		12			74			41			792			(919	)		—

Total Revenues and Other Income		(3,222	)		760			41			6,665			4,638			8,882


Costs and Expenses
Purchased commodities		—			2,637			—			1,038			(753	)		2,922
Production and operating expenses		—			135			—			1,191			(1	)		1,325
Selling, general and administrative expenses		2			71			—			22			—			95
Exploration expenses		—			33			—			64			—			97
Depreciation, depletion and amortization		—			204			—			1,421			—			1,625
Impairments		—			1,074			—			5,220			—			6,294
Taxes other than income taxes		—			36			—			162			—			198
Accretion on discounted liabilities		—			10			—			82			—			92
Interest and debt expense		125			171			36			139			(165	)		306
Foreign currency transaction (gains) losses		(15	)		2			19			7			—			13
Other expenses		217			60			—			(1	)		—			276

Total Costs and Expenses		329			4,433			55			9,345			(919	)		13,243

Loss before income taxes		(3,551	)		(3,673	)		(14	)		(2,680	)		5,557			(4,361	)
Income tax provision (benefit)		(111	)		(438	)		11			(397	)		—			(935	)

Net loss		(3,440	)		(3,235	)		(25	)		(2,283	)		5,557			(3,426	)
Less: net income attributable to noncontrolling interests		—			—			—			(14	)		—			(14	)

Net Loss Attributable to ConocoPhillips	$	(3,440	)		(3,235	)		(25	)		(2,297	)		5,557			(3,440	)


Comprehensive Income (Loss) Attributable to ConocoPhillips	$	(3,821	)		(3,616	)		30			(2,263	)		5,849			(3,821	)

*Certain amounts have been reclassified to conform to the current-period presentation resulting from the adoption of ASU No. 2017-07.

See Note 2—Changes in Accounting Principles, for additional information.

See Notes to Consolidated Financial Statements.


	Millions of Dollars
	Six Months Ended June 30, 2018
Income Statement	ConocoPhillips			ConocoPhillips Company			ConocoPhillips Canada Funding Company I			All Other Subsidiaries			Consolidating Adjustments			Total Consolidated
Revenues and Other Income
Sales and other operating revenues	$	—			7,444			—			9,858			—			17,302
Equity in earnings of affiliates		2,659			3,232			—			577			(5,995	)		473
Gain on dispositions		—			3			—			59			—			62
Other income		—			291			—			73			—			364
Intercompany revenues		19			90			87			2,608			(2,804	)		—

Total Revenues and Other Income		2,678			11,060			87			13,175			(8,799	)		18,201


Costs and Expenses
Purchased commodities		—			6,691			—			2,561			(2,474	)		6,778
Production and operating expenses		—			425			—			2,096			(37	)		2,484
Selling, general and administrative expenses		5			155			—			62			(5	)		217
Exploration expenses		—			91			—			73			—			164
Depreciation, depletion and amortization		—			275			—			2,575			—			2,850
Impairments		—			(10	)		—			(13	)		—			(23	)
Taxes other than income taxes		—			78			—			378			—			456
Accretion on discounted liabilities		—			9			—			168			—			177
Interest and debt expense		147			300			73			129			(288	)		361
Foreign currency transaction (gains) losses		34			(9	)		(85	)		62			—			2
Other expenses		—			342			—			(2	)		—			340

Total Costs and Expenses		186			8,347			(12	)		8,089			(2,804	)		13,806

Income before income taxes		2,492			2,713			99			5,086			(5,995	)		4,395
Income tax provision (benefit)		(36	)		54			(6	)		1,829			—			1,841

Net income		2,528			2,659			105			3,257			(5,995	)		2,554
Less: net income attributable to noncontrolling interests		—			—			—			(26	)		—			(26	)

Net Income Attributable to ConocoPhillips	$	2,528			2,659			105			3,231			(5,995	)		2,528


Comprehensive Income (Loss) Attributable to ConocoPhillips	$	2,351			2,482			(18	)		2,959			(5,423	)		2,351


Income Statement	Six Months Ended June 30, 2017*
Revenues and Other Income
Sales and other operating revenues	$	—			6,069			—			8,230			—			14,299
Equity in earnings (losses) of affiliates		(2,578	)		(1,124	)		—			313			3,767			378
Gain on dispositions		—			29			—			1,869			—			1,898
Other income		1			15			—			62			—			78
Intercompany revenues		29			145			83			1,586			(1,843	)		—

Total Revenues and Other Income		(2,548	)		5,134			83			12,060			1,924			16,653


Costs and Expenses
Purchased commodities		—			5,402			—			2,228			(1,516	)		6,114
Production and operating expenses		—			267			—			2,351			(2	)		2,616
Selling, general and administrative expenses		6			147			—			44			(5	)		192
Exploration expenses		—			404			—			243			—			647
Depreciation, depletion and amortization		—			455			—			3,149			—			3,604
Impairments		—			1,074			—			5,395			—			6,469
Taxes other than income taxes		—			85			—			344			—			429
Accretion on discounted liabilities		—			20			—			167			—			187
Interest and debt expense		254			336			73			278			(320	)		621
Foreign currency transaction (gains) losses		(22	)		2			68			(25	)		—			23
Other expenses		217			130			—			(3	)		—			344

Total Costs and Expenses		455			8,322			141			14,171			(1,843	)		21,246

Loss before income taxes		(3,003	)		(3,188	)		(58	)		(2,111	)		3,767			(4,593	)
Income tax provision (benefit)		(149	)		(610	)		6			(1,013	)		—			(1,766	)

Net loss		(2,854	)		(2,578	)		(64	)		(1,098	)		3,767			(2,827	)
Less: net income attributable to noncontrolling interests		—			—			—			(27	)		—			(27	)

Net Loss Attributable to ConocoPhillips	$	(2,854	)		(2,578	)		(64	)		(1,125	)		3,767			(2,854	)


Comprehensive Income (Loss) Attributable to ConocoPhillips	$	(3,003	)		(2,727	)		17			(901	)		3,611			(3,003	)

*Certain amounts have been reclassified to conform to the current-period presentation resulting from the adoption of ASU No. 2017-07.

See Note 2—Changes in Accounting Principles, for additional information.

See Notes to Consolidated Financial Statements.


	Millions of Dollars
	June 30, 2018
Balance Sheet	ConocoPhillips		ConocoPhillips Company		ConocoPhillips Canada Funding Company I		All Other Subsidiaries		Consolidating Adjustments			Total Consolidated
Assets
Cash and cash equivalents	$	—		53		1		3,180		—			3,234
Short-term investments		—		—		—		612		—			612
Accounts and notes receivable		7		2,273		—		4,589		(2,939	)		3,930
Investment in Cenovus Energy		—		2,159		—		—		—			2,159
Inventories		—		152		—		941		—			1,093
Prepaid expenses and other current assets		—		147		7		450		(24	)		580

Total Current Assets		7		4,784		8		9,772		(2,963	)		11,608
Investments, loans and long-term receivables*		29,130		47,927		2,526		19,682		(89,431	)		9,834
Net properties, plants and equipment		—		4,370		—		42,407		(471	)		46,306
Other assets		22		792		190		1,315		(1,131	)		1,188

Total Assets	$	29,159		57,873		2,724

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company